the partnership; the making of goldman sachs (2008)

Marcus Goldman advanced Sam Sachs fifteen thousand dollars so he could liquidate his small dry goods business in an orderly way and make his capital com­mitment to the partnership.. Harry

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T H E M A K I N G O F

GOLDM AN SACHS

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winter of 1963 at Harvard Business School, I was, like all my class­mates, looking for a job My attention was drawn to a three-by-five piece of yellow paper posted at eye level on a bulletin board in Baker Library In the upper left corner was printed “Correspondence Opportunities” and typed to the right was the name “Goldman Sachs.” As a Boston securities lawyer, my dad had a high regard for the firm, so I read the brief description of the job with inter­est but was stopped by the salary: $5,800

My then wife had just graduated from Wellesley with three distinctions: she was a member of Phi Beta Kappa, a soprano soloist, and a recipient of student loans I was determined to pay off those loans, so I figured I’d need to earn at least

$6,000 With no thought of the possibility of earning a bonus or a raise, I naively

“knew” I could not make it on $5,800 So Goldman Sachs was not for me If I had joined the firm, like everyone else who has made a career with Goldman Sachs I would never have written an insider’s study of Goldman Sachs.*

* John Whitehead and Robert Rubin have both included a few stories about the firm in their books but have cer­

In the early 1970s, while promising future partners that we would develop our fledgling consultancy, Greenwich Associates, into a truly superior profes­sional firm, I had to laugh at myself: “You dummy! You make the promise, but you don’t even know what a truly superior professional firm is all about or how to get there You’ve never even worked for one You’d better learn quickly.” From then on, at every opportunity I asked my friends and acquaintances in law, consulting, investing, and banking which firms they thought were the best

in their fi eld and what characteristics made them the best Over and over again, well past the bounds of persistence, I probed those same questions Inevitably, a pattern emerged

A truly great professional firm has certain characteristics: The most capable professionals agree that it is the best firm to work for and that it recruits and keeps the best people The most discriminating and significant clients agree that the firm consistently delivers the best service value And the great firms have been and will be, sometimes grudgingly, recognized by competitors as the real leaders in their field over many years On occasion, challenger firms rise to prominence— usually on the strength of one exciting and compelling service capability—but do not sustain excellence

Many factors that contribute to sustained excellence vary from profession to profession, but certain factors are important in every great firm: long-serving and devoted “servant leaders”; meritocracy in compensation and authority; dispro­portionate devotion to client service; distinctively high professional and ethical standards; a strong culture that always reinforces professional standards of excel­lence; and long-term values, policies, concepts, and behavior consistently trump­ing near-term “opportunities.” Each great organization is a “one-firm firm” with consistent values, practices, and culture across geographies, across very differ­ent lines of business, and over many years All the great firms have construc­tive “paranoia”—they are always on the alert for and anxious about challenging competitors However, they seldom try to learn much from competitors: they see themselves as unique But like Olympic athletes who excel in different events, they are also very much the same

partners, wrote a thoughtful and wide-ranging study centered on the development of the firm in the 1980s and 1990s

Bob Lenzner, a gifted writer for Forbes who had worked in arbitrage at Goldman Sachs a generation ago, started a

Armed by Greenwich Associates’ extensive proprietary research and work­ing closely as a strategy consultant with all the major securities firms, I was in

a unique position to make comparisons between competing firms on the dozens

of salient criteria on which they were evaluated by their own clients market by market, year after year, and particularly over time Over the years, I became con­vinced that my explorations were producing important discoveries that would

be of interest to others who are fascinated by excellence, who retain professional

fi rms for important services, or who will spend their working careers in profes­sional firms One discovery surprised me: In each profession, one single firm is usually recognized as “the best of us” by the professional practitioners—Capital Group in investing, McKinsey in consulting, Cravath in law (nicely rivaled by Davis Polk or Skadden Arps), and the Mayo Clinic in medicine (nicely rivaled

by Johns Hopkins) And Goldman Sachs in securities

Ten or twenty years ago, many people in the securities business would have argued that other firms were as good or better, but no longer (Much further back, few would have ever chosen Goldman Sachs.) For many years, it has seemed clear

to me that Goldman Sachs had unusual strengths Compared to its competitors, the firm recruited more intriguing people who cared more about their firm Their shared commitments, or “culture,” was stronger and more explicit And the lead­ers of the firm at every level were more rigorous, more thoughtful, and far more determined to improve in every way over the longer term They took a longer­

horizon view and were more alert to details They knew more about and cared

more about their people They worked much harder and were more modest They

knew more and were hungrier to learn Their focus was always on finding ways

to do better and be better Their aspirations were not on what they wanted to be, but on what they wanted to do

Goldman Sachs has, in the last sixty years, gone from being a marginal Eastern U.S commercial-paper dealer, with fewer than three hundred employ­ees and a clientele largely dependent on one improbable investment banker, to a global juggernaut, serially transforming itself from agent to managing agent to managing partner to principal investor with such strengths that it operates with almost no external constraints in virtually any financial market it chooses, on the terms it chooses, on the scale it chooses, when it chooses, and with the partners it chooses

Of the thirty thousand people of Goldman Sachs, fewer than half of one per­

cent are even mentioned in this book, but the great story of Goldman Sachs is

really their story—and that of the many thousands who joined the firm before

them and enabled it to become today’s Goldman Sachs Goldman Sachs is a part­

nership The legal fact that after more than a hundred years it became a public

corporation may matter to lawyers and investors, but the dominating reality

is that Goldman Sachs is a true partnership in the way people at the firm work

together, in the way alumni feel about the firm and each other, and in the power­

ful spiritual bonds that command their attention and commitment

The leaders of Goldman Sachs today and tomorrow may have even tougher

jobs than their predecessors The penalties of industry leadership, particularly

the persistent demand to meet or beat both internal and external expectations for

excellence—over and over again on the frontiers of competitive innovation—are

matched by the persistent challenges of Lord Acton’s warning: “Power tends to

corrupt Absolute power corrupts absolutely.”

Three great questions come immediately to any close observer: Why is Gold­

man Sachs so very powerful on so many dimensions? How did the fi rm achieve

its present leadership and acknowledged excellence? Will Goldman Sachs con­

tinue to excel?

The adventures that crowd the following pages point to the answers

Charles D Ellis New Haven, Connecticut

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have remarkable importance for Goldman Sachs: Looking for a job, sixteen-year-old Sidney Weinberg headed back to Wall Street The territory was familiar Young Weinberg had worked there briefly as a “flower and feather horse,” delivering millinery goods for two dollars a week, and one

employers found out he held two other identical jobs and all three firms promptly

fi red him

Earlier in 1907 Weinberg had learned from a pal on the Manhattan ferry that there was a panic on Wall Street, which Weinberg later admitted “meant no more to me than if you said it was raining.” The panic caused

Brooklyn-to-a run on the Trust CompBrooklyn-to-any of AmericBrooklyn-to-a, so Weinberg could mBrooklyn-to-ake even more money—up to five dollars a day—by standing in the long queue of anxious depositors who lined up to withdraw their balances and, when he got close to the bank’s door, selling his place in the line to a late- arriving, desperate depositor Quickly getting back in line to work his way up to the door, he did the same thing all over again Pocketing all the money he could, Weinberg skipped school, but

after having played hooky for a full week, he was not allowed to return to school

at PS 13 So now he needed a real job

His father, Pincus Weinberg, was a struggling, Polish-born wholesale liquor dealer and sometime bootlegger who, having been widowed with eleven children, had recently remarried His new wife did not want the third-eldest child—that fresh kid—around the house, so Sidney was pushed out to fend for himself As

a seventh-grade dropout, he had only one apparent advantage—a general letter

of introduction signed by one of his teachers, saying: “To whom it may concern:

It gives me great pleasure to testify to the business ability of the bearer, Sidney Weinberg He is happy when he is busy, and is always ready and willing to oblige

We believe he will give satisfaction to anyone who may need his services.” Short—his legs were only twenty-six inches long—and with a speaking voice that was heavily larded with a thick Brooklyn Jewish accent in which girls were

“goils,” oil was “erl,” and turmoil was “toi- merl,” Weinberg went looking for a

job—any job Deciding to try lower Manhattan’s financial district, he concen­

trated on the tall buildings As he later explained his first triumph on Wall Street,

“Looking for an indoor job, I walked into 43 Exchange Place, a nice- looking, tall building, at eight o’clock one morning and took the elevator to the twenty-third floor Starting from the top, I stuck my head in every office and asked as politely

as I could, ‘Want a boy?’ By six o’clock, I had worked my way down to the third floor and still had no job Goldman Sachs was on that floor and it was closing up for the day The cashier told me there was no work, but to come back Next morn­ing, I came back at eight o’clock and started right where I had left off.”

Brazenly, Weinberg said he had been asked to come back “The cashier, Mr

Morrissey, turned to the hall porter: ‘Jarvis, do you need an assistant?’ Jarvis was willing, so they hired me at $5 a week as assistant to Jarvis the janitor.” His new job included the lowly task of cleaning out cuspidors.* Lowly, but a start

Weinberg did not stay long at the starting line Told to take an eight-foot

* Until his death at seventy-seven in 1969, Weinberg kept in his office the brass spittoon he allegedly polished for Jarvis in his first job He also kept a bag he bought as a naive young man at Niagara Falls from a smooth-talking con man who said, “You look like a great young man Do you know that down at the bottom of those falls are diamonds and nobody’s been able to get them, but I can, and I have some of them in this little bag here, and I’m willing to sell

it to you.” “Well, how much do you want for it?” “One buck,” said the man “I haven’t got a dollar I’ve only got fifty cents left.” “Well, you’re such a promising young man I’ll sell it to you for fifty cents.” Weinberg bought the bag for fifty cents and soon learned there was nothing in it but an ordinary pebble He kept that pebble all his life as a

flagpole uptown on the trolley—“Ever try to carry a flagpole on a trolley car?

It’s one hell of a job! ”—Weinberg arrived at Paul Sachs’s door, where he was met

not by a butler, but by Mr Sachs himself, a son of Goldman Sachs’s first junior partner Demonstrating his lifelong knack for becoming friendly with men in high positions who could help him, Weinberg so impressed Sachs with his energy and brightness that Sachs invited the likable teenager to stay for dinner— with, of course, the servants Weinberg soon became head of the mail room and prepared

a complete plan for its reorganization that again brought him to the attention of Paul Sachs, who would become Weinberg’s “rabbi” among the partners of his new employer

Sachs decided to send Weinberg to Browne’s Business College in Brooklyn for

a course in penmanship and to learn something about the math of Wall Street.2 Sachs paid the $50 tuition, advised Weinberg to clean up his rough language, told him how

to advance within Goldman Sachs, and continued to watch over and watch out for him “Until he took me in hand, I was an awful kid—tough and raw Paul Sachs gave

me another $25 to pay for a course at NYU He didn’t tell me what course to take I had never heard of New York University, but I sought it out Lots of courses didn’t interest me One course was called Investment Banking I knew the firm was in the investment banking business, so I took that course I think it did me a lot of good.” Weinberg took one other course to complete his education: “Some time later, they were considering promoting me to the foreign department I went to Columbia University and took a course in foreign exchange.” He also developed his office skills “At that time, the firm used mimeographed sheets offering com­mercial paper I became proficient at making copies and won the $100 prize as the fastest operator of National Business Equipment mimeograph machines at the New York Business Show in 1911.”

Irreverent then as later, brash young Weinberg was clearly on the make: “I had expensive tastes and used to sit behind one of those big desks after the bosses went home and smoke fifty-cent cigars that belonged to one of the men I later became partners with.” When too slow a series of promotions at the firm left him frustrated, Weinberg quit in 1917 to enlist as a seaman in the U.S Navy Nearsighted, short, and scrappy, he cajoled his recruiting officer into inducting him as an assistant cook,

a rating for which he affected great pride in later years, even though he actually transferred after a few weeks to Naval Intelligence at Norfolk, Virginia.3

A friend4 told of Weinberg’s being the guest of honor at J P Morgan’s lun­cheon table, where the following exchange occurred: “Mr Weinberg, I presume you served in the last war?”

“Yes, sir, I was in the war—in the navy.”

“What were you in the navy?”

“Cook, Second Class.”

Morgan was delighted

berg joined in 1907—and later helped to rescue from a disaster, and eventu­ally propelled almost to Wall Street’s top tier— was already nearly four decades old when Weinberg arrived The financial colossus got its start as the inconspicu­ous business of a single immigrant with no staff and almost no capital Marcus Goldman, the son of a peasant cattle drover, was twenty-seven when he left the village of Burbrebae near Schweinfurt in Bavaria during the turmoil of Europe’s conservative counterrevolutions of 1848 Having decided like millions of others

to leave Europe, he had taught school for several years to save enough money

to pay for his six-week crossing of the stormy Atlantic Ocean as part of the fi rst major Jewish migration to America

The Kuhns, the Lehmans, the Loebs, the Seligmans, and others—the families that called themselves “our crowd”— were already establishing the German Jewish banking community that became powerful as the United States industrialized But with no connections to that crowd, Goldman began working as an itinerant mer­chant peddler in New Jersey There he met and married Bertha Goldman, no rela­tion, the eighteen-year-old daughter of a locksmith and jeweler from Darmstadt in northern Germany They settled in Philadelphia and moved to New York in 1869 Interest rates were high following the Civil War, and Goldman developed

a small business in mercantile paper—similar to today’s commercial paper—

in amounts ranging upward from $2,500 Commercial banks had few if any branches and expected customers to come to them, so this left an opportunity for entrepreneurs like Goldman to get to know the merchants, evaluate their creditworthiness, and act as an intermediary between small borrowers and insti­

tutional lenders Goldman conducted most of his business among the wholesale jewelers on Maiden Lane in lower Manhattan and in the nearby “swamp” area where leather merchants congregated on John Street Both groups were doing their business with minimal capital, so money lending or “note shaving” was a profitable opportunity for someone as diligent as Goldman He either bought the merchants’ promissory paper at a price discounted at 8 percent to 9 percent per annum or worked on a consignment fee of half of 1 percent, which could produce

a much higher return if turnover was rapid

“It was a small business done in a small way, but with accuracy and exacti­

band of his high silk hat, Goldman would take a horse-drawn cab up Broadway to the crossing of Chambers and John streets to visit the commercial banks where he hoped to resell the paper at a small profi t Over a century and a half of persistent entrepreneurship, his tiny proprietorship would evolve and grow into the world’s leading securities organization, but in 1870, forty-nine-year-old Marcus Goldman was still an outsider at the lower end of the financial food chain By the end of that year, however, he had developed enough business to employ a part-time book­keeper and an office boy Dressed in a Prince Albert frock coat and tall silk hat, he presented himself rather grandly as “Marcus Goldman, Banker and Broker.”

In 1882, thirteen years into his career as a sole proprietor, Goldman’s annual profits, which were not taxed, approximated fifty thousand dollars Perhaps beginning to feel flush, he took thirty-one-year-old Samuel Sachs—the husband

of his youngest daughter, Louisa Goldman—as his junior partner and renamed the firm M Goldman and Sachs

Marcus and Bertha Goldman enjoyed a particularly warm and close friend­

Julius, had married the Goldmans’ daughter Rosa in a match approved by both mothers The two mothers agreed that another Sachs-Goldman marriage would

be desirable, and Sam Sachs, who had begun work at fifteen as a bookkeeper, soon married Louisa Goldman

Marcus Goldman advanced Sam Sachs fifteen thousand dollars so he could liquidate his small dry goods business in an orderly way and make his capital com­mitment to the partnership The loan was to be repaid over three years in three

promissory notes of five thousand dollars each By the time Sam and Louisa’s third son was born, Sam had repaid Marcus two of the three notes, and Marcus, in his old-fashioned German script, wrote formally to his son- in- law to say that, in recognition of Sam’s energy and ability as a partner, and in honor of little Walter’s arrival, he was forgiving Sam the final payment Thus, Walter Sachs was able to say many years later, “It appeared that on the very first day of my entrance into

Louisa Goldman Sachs, a sentimental sort, always kept her father’s letter, along with the canceled note, in the little strongbox where she also kept, tied in faded bows, her little boys’ silky blond ringlets and, dated and labeled, all their baby teeth

The name of the firm became Goldman, Sachs & Co in 1888 During the firm’s first fifty years, all partners were members of a few intermarrying fami­lies, and its business affairs were always conducted by consensus By the 1890s Goldman Sachs was already the nation’s largest dealer in commercial paper Sales doubled from $31 million in 1890 to $67 million in 1894; two years later the firm joined the New York Stock Exchange To expand beyond New York City, Henry Goldman began making regular trips to such business centers as Chicago, St

Hartford, Boston, and Philadelphia

In 1897 Sam Sachs, hoping to expand the business and bearing a letter of introduction from England’s leading coffee merchant, Herman Sielcken, went to London and called at 20 Fenchurch Street on Kleinwort, Sons & Co The Klein-worts, whose business had originated in Cuba in 1792, had transferred their oper­ations to London in 1830 to engage in merchant banking, and seventy years later were important merchant bankers there, accepting checks and other so-called bills of exchange from around the world and, with their well-established credit­worthiness, enjoying the best rates in the city To Herman and Alexander Klein-wort, who were looking for a more aggressive American correspondent than

New York and the attractive possibilities for both foreign exchange and arbitrage between the markets in New York and London

Although Sachs’s proposition was clearly interesting, the Kleinworts, given their sterling reputation, were understandably cautious about doing business

with a firm they did not know They inquired through August Belmont, the lead­ing Jewish banker in New York City and N M Rothschild’s New York agent, about the acumen, integrity, and zeal of the firm Hearing no evil, Kleinwort, Sons & Co accepted Goldman Sachs’s proposal for a joint undertaking, and it ran successfully for many years without a written contract

The business friendship was not always as easily matched by a social friend­ship The Kleinworts soon began a custom of entertaining the Sachses at their country home, but were amused by the unsophisticated Americans and learned to

be careful about which of their wealthy and cultured English friends they enter­tained at home while the Sachses were visiting Walter Sachs recalled reaching out during a visit when he was fi fteen to shake hands and saying, “How do you

do, sir?”—to the Kleinworts’ butler As a young trainee, Walter Sachs would again blunder, passing on to Alexander Kleinwort that he had heard a concern expressed in the City about the amount of Goldman Sachs–Kleinwort paper on the market The great man listened in granite silence Only weeks later was Sachs advised privately of his transgression: In a breach of business etiquette, he had nearly implied the slight possibility of the impossible—that anyone would ever doubt or question Mr Kleinwort’s impeccable credit standing

Correspondent relationships were opened with banks on the Continent Goldman Sachs limited activities to self- liquidating transactions to avoid risk­ing capital, and profits in the foreign department rose to five hundred thousand

in New York against those in London, where they were substantially lower even after the joint operation’s commission of 0.5 percent for ninety-day paper With its credit established in Europe’s financial markets, Goldman Sachs extended the money- market activities, at least in small amounts, to South America and into the Far East

Marcus Goldman remained a partner until his death in 1909 Sam and Harry Sachs continued to build the firm’s most important business: commercial paper Harry Sachs later admonished his son: “Never neglect this specialty.” Meanwhile, Henry Goldman, who was as boldly expansionist as Sam Sachs was meticulous and conservative, sought to develop a domestic securities business by selling rail­road bonds to savings banks in New York and New England

In the mid-1890s, the firm had occupied two rooms on the second floor at

9 Pine Street,* with a staff of nearly twenty working from 8:30 a.m to 5 p.m each day of a six-day week It moved in 1897 to 31 Nassau Street To build the commercial-paper business, Goldman Sachs opened its first branch office in Chi­cago in 1900, and a one-man office was soon operating in Boston Thanks mainly

to the rapidly expanding commercial-paper business, capital reached one mil­lion dollars in 1904, when the firm moved again to the more spacious quarters on Exchange Place

Goldman Sachs was prospering, and its partners, led by Henry Goldman, had a new ambition: to expand into investment banking

securities business in the early twentieth century—underwriting the new bond and stock issues of the rapidly expanding, cash- hungry railroads J.P Mor­gan, Kuhn Loeb, and Speyer & Company operated an effective underwriting oli­gopoly, and these dominant investment banking firms warned Henry Goldman that they would do whatever it took to prevent his firm’s getting any part of this large and lucrative business Goldman was not intimidated; he was angry and keen to fight his way in, but he couldn’t find an opening His only choice was to retreat and look for other opportunities That proved fortunate: If the oligopo­lists had opened the door a crack, Goldman Sachs would have struggled for years

to build up a share of a business that had already peaked and was entering a long, long decline—eventually leading to multiple bankruptcies

The attempted expansion into railroad bonds led to what was long remem­

lion dollars of a bond issue by a Midwest railroad Expecting to earn a 0.5 percent syndication fee, the firm instead suffered a considerable loss when interest rates suddenly rose before Goldman Sachs and the other members of the underwriting syndicate had sold their allocations to investors

As so often in Goldman Sachs’s history, specific gains and losses led to stra­tegic entrepreneurial decisions Locked out of underwriting the major railroads, Henry Goldman turned to the then unsavory business of “industrial” financing

* Having moved from 30 Pine Street In 1928, at least partly for sentimental reasons, the fi rm built a twenty-one­

Most industrial companies were still rather small proprietorships; only a few of the larger enterprises were looking for more capital than their owners and com­mercial banks could provide Goldman Sachs began near the bottom with manu­facturers of cigars The firm owed at least part of the opportunity in financing cigar manufacturers, and later retailers, to religion Two leading financiers—

J P Morgan and George F Baker of what is now Citigroup— would not deal with “Jewish companies” but left these companies for “Jewish firms” like Gold­man Sachs

After the turn of the century, the partners of the family fi rm, led by Henry Goldman, were increasingly committed to growth and expansion In 1906 an opportunity came in the form of a company recently established by the merger

of three cigar-making companies into United Cigar (later renamed General

paper for several years as they financed inventories, and United’s chief executive,

both keen to do business, but the public securities markets, both debt and equity, had always been carefully based on the balance sheets and the capital assets of the corporations being financed—which is why railroads were such important cli­ents To expand, United Cigar needed long-term capital Its business economics were like a “mercantile” or trading organization’s—good earnings, but little in capital assets In discussions with United’s half dozen shareholders, Henry Gold­man showed his creativity in finance: He developed the pathbreaking concept that mercantile companies, such as wholesalers and retailers—having meager assets to serve as collateral for mortgage loans, the traditional foundation for any public financing of corporations—deserved and could obtain a market value for their business franchise with consumers: their earning power

Fortunately, a friendship led simultaneously to a timely expansion of resources Henry Goldman introduced his pal Philip Lehman and the firm of Lehman Brothers, then an Alabama cotton and coffee merchant, into the discus­sions with United Cigar Philip Lehman, one of five ambitious brothers, was able and competitive “At anything he did, Philip had to win,” said a member of his family.14 Philip Lehman was determined to see Lehman Brothers venture into the New York City business of underwriting securities and often discussed the opportunities with Henry Goldman Sam Sachs’s summer place in Elberon, New

Jersey, was back to back with Lehman’s, so it was easy to discuss business and make deals over the shared back fence

The wealthy Lehmans were looking for new opportunities to invest for growth, and with their substantial capital they could be valuable part­ners in underwriting securities The process of underwriting and distribut­

them to investors—lacked the established industry structure and the swift, well-organized procedures that would later develop Selling the securities of

an unfamiliar company could take a long time—three months was not at all unusual—so the underwriter’s reputation and capital were of great importance

in supporting the sale In a rapidly expanding firm-to-firm partnership, the mans provided the clients and the Lehmans provided the capital Their sharing arrangement would continue until 1926

Gold-The sale of United Cigar’s common shares, “of necessity a prolonged

forty-five thousand shares of the company’s preferred stock plus thirty thousand shares

of common stock for a total of $4.5 million After several months of continuous selling efforts, the securities were sold to investors for $5.6 million, a 24 percent markup In addition, Goldman Sachs kept 7,500 shares as part of its compensa­tion, adding another three hundred thousand dollars to the firm’s profits More important, this innovative financing—based on earnings instead of assets— opened up new opportunities for Goldman Sachs A successful debt underwriting followed, for Worthington Pump

Another major financing—and the start of a very important relationship— developed from taking up a conventional family responsibility Before the turn

had reluctantly taken in a boarder from Germany because he was a distant rela­tive, despite their not caring much for him; he seemed crude and uncultured The boarder was Julius Rosenwald, who soon went west and linked up with Richard Sears, becoming the one-third owner of Sears Roebuck by merging his firm, Ros­enwald & Weil, with Sears’s mail-order operation Together they would build the mail-order business that eventually made Sears Roebuck a major American com­pany, but back in 1897, with net worth less than $250,000, they first needed work­ing capital to finance inventories of merchandise purchased in New York City

Apparently Rosenwald never knew how restrained his welcome at the Sachs home had been, but he did know that Emelia’s brother Sam’s firm could raise money and was looking for business Rosenwald, as Sears’s treasurer, turned naturally to Goldman Sachs to sell Sears Roebuck’s commercial paper Goldman Sachs arranged a seventy- five- million- dollar commercial- paper financing and was soon linked to an explosively growing retailing client with voracious needs for financing

Less than ten years later, after substantial growth and with great expecta­tions, Sears and Rosenwald decided they needed five million dollars in long-term capital to build a major mail-order plant in Chicago Rosenwald turned again to Sam Sachs’s firm, hoping it could arrange a loan, but Henry Goldman countered with a bigger and better proposition: a public stock offering for ten million dollars

to be underwritten jointly by Lehman Brothers and Goldman Sachs

Since there had never before been a public flotation of securities for a order company, there was no way to know in advance how investors might respond The stock issue was clearly daring Once again the entrepreneurial inno­vator, Henry Goldman proposed using the United Cigar “formula”: Preferred stock would be supported by hard net assets, while the earning power of Sears Roebuck’s customer acceptance—its goodwill franchise— would be the basis for

mail-a simultmail-aneous issue of common stock The Semail-ars Roebuck underwriting, with many shares placed in Europe through Kleinwort, was eventually a substantial

success for investors, but completion took an agonizing nine months—three times

the ninety days needed to complete the United Cigar underwriting

By 1910 Goldman Sachs had three senior and three junior partners Sears’s stock had already doubled—and went on to double again To watch out for their investors’ interests and because, in those days, the bankers were better known

to investors than the companies they underwrote, Henry Goldman and Philip Lehman joined the boards of directors of both Sears Roebuck and United Cigar This watchdog role led later to Walter Sachs’s succeeding Henry Goldman as

a Sears Roebuck director—and to his being succeeded by Sidney Weinberg in what had become known in- house as a firm tradition

Goldman Sachs and Lehman Brothers not only found a fast-growing client in Sears Roebuck, they jointly launched a substantial business in financing retailers and up-and-coming industrial companies Lehman Brothers and Goldman Sachs

jointly underwrote the initial public offerings of May Department Stores, Under­wood Typewriter, Studebaker, B.F Goodrich, Brown Shoe, Cluett Peabody, Continental Can, Jewel Tea, S.H Kress, and F.W Woolworth In 1909, with Sears Roebuck’s market value up over 250 percent, Goldman Sachs organized a nine- million-dollar syndicate to buy out Richard Sears’s personal ownership Walter Sachs, fresh out of Harvard College, where he was elected to the

Crimson with Franklin D Roosevelt, joined the firm in 1907—the same year Sid­

ney Weinberg became an assistant janitor Sachs started as a commercial paper salesman, covering accounts in Hartford and Philadelphia A few years later he was in Chicago, opening an account with J Ogden Armour at Armour & Co Because Goldman Sachs could offer access to the lower-cost London money mar­ket through its Kleinwort connection, the initial Armour account was large: five hundred thousand dollars.*

Henry Goldman and Philip Lehman developed an unusual collaborative arrangement: Lehman Brothers and Goldman Sachs would each continue with its own business specialty—commodities for Lehman Brothers and commercial paper for Goldman Sachs— while the two friends’ firms conducted a joint ven­ture in securities underwriting, splitting profits fifty-fifty The capital required was eventually too much for the two Americans firms, so they organized a three-

Goldman Sachs’s business with F.W Woolworth & Co illustrated Henry Goldman’s drive After being refused by another underwriter who found it

“unfitting” to be identified as the underwriter of the common stock of a mere and-dime store chain, Frank Woolworth approached Goldman Sachs Dynamic and imaginative, Woolworth had expanded his company by acquiring other companies and now wanted to continue expanding by branching An aggressive financing plan was developed that still caused some awe in recollection Walter Sachs observed many years later: “Our firm was bolder and more imaginative [than others]; and bolder still was the capitalization To justify this capitalization

* Half a century later, Goldman Sachs would successfully reverse the transatlantic flow of funds, doing substantial business with major British companies because it could then raise working capital via commercial paper at cheaper rates in America than the rates charged on loans by the British banks—and, still benefiting from Kleinwort’s stature,

Sachs was not exaggerating Woolworth’s sales were sixty million dollars and its net assets fifteen million dollars Preferred stock of fifteen million dollars was issued against 100 percent of the assets, and common stock of fifty million dollars was issued against goodwill based on projections that sales would rise rap­idly and lift earnings to $5.4 million—with expectations for more growth gener­ously added in

Fortunately, investors were enthusiastic Woolworth’s preferred and com­mon shares both went quickly to a premium over the issuing price Offered

at fifty-five dollars, the common stock went to eighty dollars on the first day of trading The preferred stock was eventually retired in 1923 at $125 a share With successes like Sears and Woolworth, Goldman Sachs advanced rapidly from just a Jewish outsider that struggled to complete its underwritings to a firm increasingly recognized as innovative, effective, and highly profitable to itself and

to investors On April 24, 1913, a year after the successful Woolworth offering, completion of the truly monumental Woolworth building in lower Manhattan—

to this day one of the most handsome skyscrapers—was celebrated at a dinner Frank Woolworth was flanked at the banquet table by Cass Gilbert, his architect, and Sam Sachs, his banker Woolworth introduced Sachs and Gilbert, saying,

“These are the two men who made this building possible.”

Until his retirement from Goldman Sachs, Arthur Sachs was a director of worth, but to the firm’s surprise, Woolworth did not elect a successor director from the firm For forty years Goldman Sachs did no business with Woolworth Still, Walter Sachs and after him Stanley Miller continued to solicit Woolworth’s business Finally, in the sixties, this led to Goldman Sachs’s issuing Woolworth’s commercial paper and arranging the purchase of Kinney Shoe Co from Brown Shoe These transactions caused Walter Sachs to observe: “I know of no situation which exem­

tion the value of forty years of solicitations for just one transaction—particularly a transaction that might have been accomplished without the considerable cumulative cost of the forty years of solicitations—but during Sachs’s years of leadership, cli­ent service was particularly important because new clients were hard to come by Still, Goldman Sachs and Lehman Brothers gained a reputation as underwriters of good companies—particularly in retailing— whose stocks performed well Partners began to say proudly these companies bore the two firms’ “hallmark.”

Around the time of the Woolworth offering, Goldman Sachs took on its first full-time new-business solicitor: Colonel Ned Arden Flood, a “colorful indi­vidual, elegant in appearance, smooth in manner Flood dressed in the height of

firm, Flood received a percentage of the profits on deals completed through his introductions He did so well at bringing new accounts to the firm—including

Flood, soliciting new business was left to younger partners and the managers of the firm’s branch offices Surely it was neither a bold nor an imaginative effort In that era—and among the leading Wall Street firms for another half century— corporations were not solicited by competitors It simply was not done

serene family world of Goldman Sachs—two of Henry Goldman’s sisters were married to Sachs brothers, and all partners in the firm were members of the two families— was disrupted by an argument over foreign affairs at a dinner at the Hotel Astor It divided the families and broke up the firm And this estrange­ment led to splitting up the joint-account arrangement that had been so successful between Goldman Sachs and Lehman Brothers

In August 1914 Germany declared war on Russia and a day later on France and England When Walter Sachs returned from England shortly after the out­break of war, expecting his partners to be strongly pro-Allies—as he had assured the Kleinworts he and all his partners would surely be—he was dismayed to find Henry Goldman proudly and intensely expressing views highly sympathetic

to Germany and making pro-German speeches When his partners and sisters begged Goldman to modify or at least conceal his feelings, he refused His pub­lic utterances became more frequent and startling Henry Goldman admired the Prussianism that others deplored, and quoted Nietzsche to anyone who would listen

The rift between Goldman and Sachs came to a head in 1915 when J.P Mor­gan offered for public subscription a fi ve- hundred-million-dollar Anglo-French loan Almost all the leading houses on Wall Street were participating, but Henry

Goldman objected, so the firm could not join in As Walter Sachs later explained,

“The firm had an age-old rule that participation in any business could only be accepted if all the partners were unanimous in their desire to accept.” Chagrined, the two Sachs brothers went to J Pierpont Morgan’s office, where each man sub­scribed personally for $125,000 of the loan

Even America’s 1917 entry into the war did not stop Henry Goldman’s “utter­

Twenty-Sixth Division, nor Paul Sachs’s service in the field with the Red Cross, nor the Liberty Bond sales by other members of the firm Nor did the Kleinworts’ warning that Goldman Sachs would be blacklisted in the City of London, nor the Bank of England’s forbidding Kleinwort to do any foreign exchange business with Gold­man Sachs The split within the firm rapidly worsened Finally Henry Goldman realized he was out of step with his partners and after thirty-five years with the firm resigned from Goldman Sachs the day the firm began selling Liberty Bonds for the United States government Goldman kept his office at the firm for a while, but “in the heated atmosphere of wartime, his very presence in the office created difficul­

shorthanded, because he had been key to all its lucrative industrial financings

In leaving, Henry Goldman withdrew his substantial capital, which created

an enormous financial problem for the firm and left its underwriting business without his dynamic, thrusting leadership.* The rupture also left Goldman Sachs under the pall of being considered a “German firm,” which hurt business Henry

continued into the next generation, and to this day there are hardly any mans who are on speaking terms with any Sachses

old job was gone and he was told if he wanted a job, he’d have to create one

* Goldman left the firm a very rich man, with successful investments in Sears Roebuck and May Department Stores

In the early 1930s he traveled to his beloved Germany with the idea of settling there permanently as a demonstra­ tion of his national loyalty He collected paintings by Rubens, Van Dyck, and Rembrandt, bought a Stradivarius for twelve- year-old Yehudi Menuhin, and gave Albert Einstein a yacht, which was confiscated by the Nazis With Hitler rising to power, Goldman was seized and searched and was subjected to “many other humiliations,” according to his

He did—as a bond trader In 1920 he married Helen Livingston, a lovely, cul­tured amateur pianist and the daughter of a dress manufacturer He soon became

a recognized authority within the firm on pricing, making recommendations based on his sense of the market Weinberg also built up the over-the-counter stock-trading business In April 1925 he bought a seat on the New York Stock

his own earnings: “None of it was from trading I never traded I’m an investment banker I don’t shoot craps If I had been a speculator and taken advantage of what I know, I would have made five times as much money.”

He became a partner of Goldman Sachs in 1927—only the second from out­side the two founding families “The people I worked with were always boosting

me, and I was made a partner ahead of many people who were senior to me They told me this was due to my personality, ability to work hard, and good health— plus integrity and character.” He became the principal assistant to senior partner Waddill Catchings As assistant treasurer of Goldman Sachs Trading Corpora­tion, Weinberg developed his knowledge and understanding of each of Trading’s various investments In the ensuing crisis, this knowledge would catapult him into much larger responsibilities and authority within the firm

h

GOLDM A N SACHS

TR ADING COR POR ATION

their firms together in a long series of transactions—they coman­aged 114 underwritings for fifty-six issuers—the two firms con­tinued to be rivals that never fully trusted each other Goldman Sachs partners believed that since they brought in a majority of the business, the original fi fty­fifty agreement should be modified Lehman partners thought Goldman Sachs was being greedy

Partly in hopes of overcoming this problem, partners of Lehman Brothers and Goldman Sachs developed a routine in the 1920s of having lunch together each day at Delmonico’s, an ornate Wall Street restaurant that specialized in rich German food One day, only halfway through the meal, one of the Goldman Sachs partners jumped up from the table, exclaiming with alarm: “I forgot to lock the safe!”

“No need to worry,” laconically responded a Lehman man, glancing around

at his partners “We’re all here.”

With Henry Goldman’s departure, the close relationship between Goldman Sachs and Lehman Brothers, which had originated with and developed through

and depended upon the friendship between Philip Lehman and Henry Gold­man, was destined to change More and more differences arose Arguments were increasingly frequent, particularly on the division of profits Why, the Leh-mans demanded, did Goldman Sachs take all the credit, with its name showing

at the top of the advertisements, for ventures for which Lehman had supplied the money? Goldman Sachs, in turn, asked why the Lehmans expected half the profits on deals originated and managed by Goldman Sachs The arguments fre­quently degenerated into name-calling As one banker has said, “They were both too ambitious to stay married.”

But there was more to it than that In the long run, the split actually benefited both firms—Lehman Brothers most of all It forced the Lehmans to take off their coats, roll up their sleeves, and go out and get into investment banking on their own, without depending on the crutch of Goldman Sachs “Lehman Brothers always had a lot of money, but that’s different from being aggressive to get busi­ness,” said a Goldman Sachs partner many years later “After the dispute, they became real go-getters.” At the same time, the split challenged Goldman Sachs to build up its own capital

During the later 1920s, a series of conferences was held to redefine the busi­ness relationship The “change in the generations” had included Waddill Catch­ings’s coming to power at Goldman Sachs and Robert “Bobby” Lehman, Paul Mazur, and John Hancock at Lehman Brothers Sidney Weinberg was among those impatient with the Lehman relationship and wanted to end it A formal memorandum of separation was prepared that listed sixty corporations that the two firms had jointly underwritten Each of the sixty was allocated to the firm with the primary interest: Goldman Sachs got forty-one, Lehman Brothers got nineteen Each firm agreed not to solicit the other firm’s clients.1

The Lehmans continued Philip’s policy of underwriting issues that seemed too undignified for other investment bankers to handle Among these were early stock offerings in airlines, electronics, motion pictures, and liquor companies, all

of which helped Lehman Brothers become what Fortune would call “one of the

biggest profit makers—many believe the biggest—in the business.” The mans liked to describe themselves as merchants of money, intermediaries between men who wanted to produce goods and men looking for something to do with their surplus funds.2

Leh-Replacing the capital that Lehman Brothers had supplied turned out to be a challenge caused by Henry Goldman’s departure that Goldman Sachs could han­dle well But replacing Henry Goldman was a challenge that the firm would not handle well—although the dire results took years to unfold

underwriting, the main business of the leading firms in Wall Street and the standard by which industry stature was and still is measured Despite its success

in the retailing industries, Goldman Sachs was still relatively unimportant The Sachs family was now clearly in control, but no employee of the firm was capable

of providing the bold, effective leadership Goldman Sachs would clearly need to recover its prewar momentum in investment banking

The search for a successor to Goldman led the partners in 1918 to invite Waddill Catchings to join the firm and head up underwriting Catchings, who grew up in Mississippi, seemed just the man A close friend of Arthur Sachs’s at Harvard, he went on to Harvard Law School and joined Goldman Sachs’s future law firm, Sullivan & Cromwell There he attracted the attention of James Wal­lace, president of the Central Trust Company, who invited Catchings on suc­cessive occasions to head reorganized companies: Millikan Brothers, Central Foundry, and Sloss Sheffield Steel & Iron This gave Catchings substantial industrial experience During the war years, he was part of the organization set

up by J.P Morgan & Co under Edward R Stettinius to purchase war supplies for the Allies, so in the final year of the war Catchings was able to become quite familiar with Goldman Sachs, its clients, and its activities His training and expe­rience seemed to suit him ideally for his major role at the firm On top of all that, Catchings was one of the most talented, charming, handsome, well-educated, and upwardly mobile people in Wall Street

Yet Catchings would in just ten years very nearly destroy the firm, prov­ing once again that articulate optimists encouraged by early successes and armed with financial leverage can become hugely destructive

“Waddill Catchings was very tall, quite handsome, and had great charisma,” said Albert Gordon, the long-serving leader of Kidder Peabody, who began his career at Goldman Sachs “More important, he not only was a lawyer, a partner

of Sullivan & Cromwell, but had had real experience in industrial management

He also had great charm and a generous way with employees For example, he had scheduled the two of us to go together to Pittsburgh to call on an impor­tant prospective client corporation, but when he heard of my plans to go duck hunting that same weekend, he simply called the CEO and explained that that tentative date would be inconvenient and suggested an alternate date That’s the

arrogance

Catchings wrote a series of books with an easy, engaging prose style that expounded optimistically on the promising economic prospects for America

he exuberantly explained: “If business is to be kept zooming, production must

be kept at high speed whatever the circumstances.” Naively, he believed that the business cycle no longer threatened and that America’s economic prospects were truly limitless Convinced that his Harvard professors had been far too theoreti­cal about long- run economics while real people cared much more about short- run results, Catchings saw himself as just the person to take the middle way and inte­grate up-to-date theory and real-world practice He intended to establish himself

as a national thought leader and was gaining the public attention he sought Meanwhile, confidence was running high among the partners of Goldman Sachs, and with Catchings’s dynamic leadership in underwriting, the firm was once again clearly moving ahead and entering an active period of industrial financ­ing Goldman Sachs’s first underwriting after the war was an issue for Endicott Johnson, the shoe maker, in 1919 The postwar boom in business, “which grew with astounding rapidity” through the twenties, led to an era of mergers in which

With his successes, Catchings became increasingly self-confident and insisted on a larger and larger ownership share in the firm By 1929 he held the largest single percentage in the partnership and was clearly the leader of Gold­man Sachs

However, Philip Lehman, the leader of Lehman Brothers, was not favorably impressed He felt Catchings lacked balance and was too aggressive and optimis­tic But Lehman’s doubts didn’t faze Catchings’s partners Neither did the cau­tions of Catchings’s Harvard classmate Arthur Sachs The partners of Goldman

Sachs, determined to make up for the loss of Henry Goldman, had been looking for a real go-getter, and Catchings was the man of the hour.6

The exciting “New Era” of economic growth accelerating through the 1920s brought increasing public recognition of America’s stature in the world, exciting new technologies, and a booming stock market with wider and wider participa­tion by individual investors Before investing in stocks became widely accessible, individual investors’ principal investment opportunities had been confined pri­marily to railroad bonds and mortgages on single- family homes Catchings got more and more interested in the trading side of the firm’s business He organized several successful pooled trading accounts, installed a stock ticker in his office, and encouraged expansion in foreign exchange The nation’s giddy overconfi­dence was best represented by a wonderfully optimistic 1928 article in a popular magazine, written by the chief fi nancial officer of General Motors Corporation, John J Raskob With the encouraging title “Everybody Ought to Be Rich,” it presented a “simple plan of moderate, prudent” borrowing on margin to buy more and more fully into the steadily rising stock market (Eventually, however, Raskob himself sold all but three thousand of his 150,000 shares of GM.)

In this heady environment, Catchings’s charismatic presentation of his opti­mistic views and his penchant for bold action would lead the firm into a major public commitment and a massive public failure With enthusiasm, Catchings advocated creating a modern “corporation of corporations”—a holding company

or investment trust similar to those being established by other securities firms

In his vision, a truly dynamic business organization would move out of markets

or products with declining profitability and move into markets and products that were new and dynamic The one great objective for investor-owners was profits—maximum profits on their invested capital—with products or markets merely the means to achieve that end So the truly modern business leader would run a pure investment trust—and concentrate on redeploying capital to maxi­mize profits

Organized as holding companies, the investment trusts were promoted as companies whose business was investing in, controlling, and managing other companies Often, but not always, these holding companies were concentrated

in a single business, particularly insurance or banking (such as A P Giannini’s Transamerica, which was an outgrowth of his original Bank of Italy, later named

Bank of America) or utilities (such as the empire constructed by Samuel Insull) The benefits, in management, innovation, and financing, of corporate consolida­tion were being demonstrated over and over again by the increased profi tability

of such merger-created corporations as General Motors, General Electric, Gen­eral Foods, and International Harvester

Catchings saw no reason to confine his futuristic vision to just one industry Why not create companies that would use these exciting modern techniques of

fi nance and management and be free to go into any industry where opportunity

was particularly great and promising— where experts in modern management and finance could make the greatest gains for investors!

Investment trusts were designed to capitalize on the continuing growth opportunities for American business, which many assumed were inevitable And not unlike the conglomerates of the 1960s, they specialized in “financial engi­neering” as they concentrated on maximizing profits to shareholders Often using borrowed money and increasingly elaborate “senior” financing—such as pre­ferred stock, convertible debt, convertible preferred stock, or debt with warrants attached to buy equity—the trusts raised capital to buy a controlling interest in operating companies They gained control of other corporations that, in turn, controlled still other corporations as subsidiaries The layers of corporations con­trolling corporations that controlled still other corporations and the opportunities for financial leverage seemed nearly endless The remarkable extent of corporate pyramiding by investment trusts was illustrated by one retailer, Metropolitan Chain Stores, whose dividends went through eight tiers of holding companies; the cash dividends paid out to common-stock investors were what little remained after paying the required dividends and interest expenses of all the layers of senior

for financial creativity to capitalize on the New Era in American industry Seeing the remarkable profitability of other firms’ ventures with investment trusts, the partners of Goldman Sachs got more and more enthusiastic As Walter Sachs later ruefully noted, “All would have been well had the firm confined its activities strictly to the type of business which had been done over the years.” Al Gordon recalled, “Catchings got quite concerned about the booming speculation

on margin in the late 1920s and for a while was almost bearish Then, with most unfortunate timing, Catchings became convinced that he could see and project all

the great growth that was ahead for this country He became quite bullish at the worst possible time in the spring of 1929.”

As plans developed, the scale of the proposed investment trust was rapidly expanded From a moderate twenty-five- million-dollar initial plan, the proposed size of the trust was doubled to fifty million dollars, and then doubled again to one hundred million dollars (about $1.2 billion in today’s dollars) A salient indicator

of the ascending prominence of the “trust concept” within the firm was the name

it was given: Goldman Sachs Trading Corporation As originators, partners

of the firm bought 10 percent of the original offering, and that ten million dol­lars represented nearly half the firm’s total capital The rest of the offering, even though the trust had not yet begun operations, was heavily oversubscribed by the investing public, and the firm made a quick profit of over three million dollars on its initial stake, lifting expectations still higher In addition to its stock ownership, Goldman Sachs would be paid 20 percent of the trust’s net income for its manage­

man Sachs Trading leaped up—in just two months, the stock jumped from its

$104 offering price to $226 per share, twice its book value in shares and cash Flush with success and eager to expand, Catchings arranged a merger with another investment trust, Financial & Industrial Corporation, which controlled Manufacturers Trust Company and a group of insurance companies This dou­bled the assets of Goldman Sachs Trading to $244 million just three months after the original issue

Walter Sachs described the growth of Goldman Sachs Trading as meteoric The trust went rapidly on to control companies with total assets over $1.5 billion

As Sachs put it, “Rising markets in investment trust shares during 1929, to which the shares of Goldman Sachs Trading were no exception, led to grandiose ideas

ownership positions in banks in New York, Philadelphia, Chicago, Los Angeles,

With serene confidence in continuing success, Catchings and Goldman Sachs were caught up in the elation of the time and went boldly on to add further leverage—at the worst possible time Despite its high price, Goldman Sachs Trad­ing repurchased fifty-seven million dollars’ worth of its own shares Joining forces with Harrison Williams, who was expanding his utilities empire, Goldman Sachs

Trading in the summer of 1929 launched two new subsidiary trusts bearing the picturesque names Shenandoah and Blue Ridge and through them invested in such holding companies as Central States Electric, North American Company, and American Cities Power & Light In addition to fifty million dollars of preferred stock, Shenandoah sold one million shares of common stock to the public at $17.80 Four million shares were taken at only $12.50 by the promoters: Goldman Sachs

the cookie jar, but euphoric investors didn’t care Shenandoah shares, seven times oversubscribed, closed the first day of trading at thirty-six dollars Shenandoah was both oversubscribed and overleveraged with $42.5 million of convertible pre­ferred stock providing over one-third of its total capital (Like debt, preferred stock

is senior to common stock, and its dividends, like bond interest, must be paid before common dividends.) One month later, Blue Ridge was launched In leverage, it went even further: fifty-eight million dollars of preferred stock or 44 percent of

$131 million in total capital Together these preferred issues had annual dividend commitments of nearly six million dollars Goldman Sachs Trading owned 40 per­cent of Shenandoah, and the partners of Goldman Sachs must have felt euphoria worthy of the first man to invent a perpetual motion machine

Partners of Goldman Sachs put considerable pressure on associates in the firm to invest in the new investment trusts at double the amount each had taken in Goldman Sachs Trading When a young associate declined the “invitation” being made to all employees to subscribe to the Shenandoah issue, Sidney Weinberg,

by then Catchings’s number two at Goldman Sachs Trading, sternly scolded the recalcitrant: “This won’t help you here.”12

Goldman Sachs Trading Corporation and its two new subsidiaries greatly expanded Goldman Sachs’s reach With total capital of less than twenty-five million dollars, the firm effectively controlled five hundred million dollars in investments—approximately six billion dollars in today’s dollars This was won­derfully convenient for an active, deal- minded Wall Street firm Goldman Sachs Trading controlled banks and insurance companies that the firm could encourage

to buy the newly issued corporate securities that Goldman Sachs was underwrit­ing, while the controlled corporations generated investment banking business for the firm All this was in addition to the substantial profits from originating the three investment trusts and any gains on the shares held by the firm

But as Walter Sachs later observed, “The entire structure had become heavy and too extensive for easy and intelligent management.” Goldman Sachs Trading’s portfolio was far too concentrated: If any of its major holdings cut or stopped paying dividends, the trust would become a house of cards And that is what happened when American Trust Company of San Francisco—then nearly

top-50 percent of Goldman Sachs Trading’s total portfolio—stopped paying divi­dends in July 1929 North American, a utility holding company controlled by Shenandoah and Blue Ridge, never paid a dividend

In early 1929, Goldman Sachs Trading had bought thirty thousand shares

of Guardian Group shares at $130, versus a market price of $120 Trading soon made a good profit But Guardian wanted to be independent, so its directors asked Sidney Weinberg to sell the shares back Correctly expecting the share price to keep rising, Weinberg indignantly refused But by October 1929, when the market price had fallen from a high of three hundred dollars to $220, another approach by Guardian got an agreement from Weinberg, who was trying to raise cash, to sell twenty-five thousand shares at $184 Weinberg got the better deal: When Guardian attempted to resell those shares, it could unload only seven thou­sand In November, to save embarrassment, Guardian directors, including Edsel Ford—one of the company’s original sponsors, who had put up $1.2 million— bought the balance of the shares at $184 even though the market value had by then dropped to just $120.13

1929 In Italy they learned of the deals Catchings was doing on his own, and Walter Sachs got worried On his return to New York, he went straight to Catchings’s apartment in the Plaza Hotel to urge greater caution But Catchings, still caught up in the bull- market euphoria, was unmoved “The trouble with you, Walter,” he said, “is that you’ve no imagination.”14

The Dow Jones Industrial Average had begun 1929 at exactly 300, fluctuated over the next five months between 300 and 320, and then soared in both price and trading volume It peaked at 381 on September 3: thirty times 1929 earnings per share, over four times book value, and yielding only 2.5 percent in dividends— astounding numbers in those days Euphoria was easy to find—National City

Bank of New York stock traded at 120 times earnings, and several companies, including International Nickel, sold at ten times book value New common stock issues jumped from an average annual volume of fi ve hundred million dollars to ten times as much in 1929— $5.1 billion, dominated by the investment trusts

By October 23, the Dow had fallen back down almost to its January level of

305 The 20 percent decline in less than two months provoked widespread margin calls, and selling seemed sure to accelerate On Thursday, October 24, the New York Stock Exchange required all 1,100 members be on the floor for the 10 a.m opening.15 Prices fell quickly, and in just half an hour the ticker tape was six­teen minutes late By one o’clock the tape was ninety-two minutes late The 3:30 closing prices were not reported until 7:35 that evening Trading volume was a record 12,894,650 shares—three times the normal volume Then margin calls and European selling, combined with urgent selling by brokers whose short-term loans were being called, ignited heavy selling on the day still called Black Fri­day, as 16.4 million shares traded—another record—and major stocks dropped

20 percent to 30 percent (Prices temporarily turned around on November 14 and rose 25 percent over just five days—and then added another 6 percent The Dow closed the year at 248.)

With the October stock market crash, Goldman Sachs Trading Corporation, which had seemed so sure to be a great success, quickly turned into an astound­ing failure Trading’s shares took their first big plunge from $326—on their way

to just $1.75, or less than 2 percent of their original value and less than 1 percent

of their market high While all the investment trusts suffered, Goldman Sachs Trading—because it was so large and so highly leveraged and because Catch­ings had optimistically made overly concentrated investments—became one of the largest, swiftest, and most complete investment disasters of the twentieth century And since the investing public saw no real difference between Goldman Sachs and Goldman Sachs Trading Corporation, the harm done to the fi rm and its reputation was comparably horrific

not at Goldman Sachs: He had left New York for the far West, partly to see to Goldman Sachs Trading’s western investments firsthand, and partly to divorce